Categories of Shariah Compliant Funds/ Case Study on iShares MSCI Islamic Funds
by Aziza Atta Founder and Managing Director of afm consulting
Bafin Islamic Finance Conference - 10 May 2012
Overview
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Defining Shariah Compliant Funds
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Categories of Shariah Compliant Funds
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Case Study on the iShares MSCI Islamic Funds
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Points to note about Shariah Compliant Funds
Defining Shariah Compliant Funds Shariah Compliant funds are investment vehicles which are fully compliant with the principles of Islamic commercial jurisprudence. The funds are prohibited from investments •
in industries categorised as anti-social or morally deficient
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in conventional banking
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in highly leveraged companies
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in other funds with offer guaranteed returns
Use of futures and options, by fund managers or the companies in which the funds invest will attract close scrutiny by Shariah boards.
Categories of Shariah Compliant Funds
Rapid increase in growth of Islamic finance over last few years has meant that the range of available Shariah Compliant funds has expanded The most common types of Shariah compliant funds are: •
Ijarah Funds leasing-type funds based on assets such as real estate or equipment
Categories of Shariah Compliant Funds •
Murabahah Funds sell assets to a client at predetermined price reflecting acquisition cost plus profit margin (cost-plus)
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Equity Funds invest directly in companies through the purchase of shares
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Commodity Funds invest in physical commodities
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Mixed Funds a combination of two or more of the categories of fund listed above
Case Study in iShare MSCI Islamic Funds
Shariah Compliant exchange traded funds • launched by Barclays Global Investors Ltd (now Blackrock Asset Management Ireland Ltd) as sub-funds of iShares II plc in December 2007 • incorporated in Ireland and authorised by the Irish Financial Regulator • initially listed on the London Stock Exchange, now also on NYSE Euronext Amsterdam, NYSE Euronext Paris.
Case Study on iShares MSCI Islamic Funds
Three funds in total, designed to offer investors a long-term return by tracking closely the performance of: • • •
MSCI World Islamic Index, MSCI Emerging Markets Islamic Index MSCI USA Islamic Index;
by investing in a portfolio of Shariah compliant equities that mirror the component constituents of the relevant index.
iShares MSCI World Islamic Fund
iShares MSCI World Islamic Fund
Case Study on iShares MSCI Islamic Funds
Dividends and Distributions • Dividends on the underlying securities are held in accounts until the relevant distribution date for the Funds. • Dividends held in sub-custodian accounts and any accrued interest will be transferred into a non-interest bearing USD account from which the distribution will be made to investors.
Case Study on iShares MSCI Islamic Funds
Dividends and Distributions • A dividend purification calculation will be applied to the dividend to detail the portion of the dividend that is from impure sources. • Positive interest that has accrued in the relevant fund over the dividend period will be added to the dividend from the impure sources. • Impure dividends will be declared in a statement that is provided to the investor such that the investor can dispose of the amount.
Case Study on iShares MSCI Islamic Funds
Funding the purchase of securities with short settlement cycles •
Where nature of market in certain jurisdictions is such that the funds may become overdrawn when a purchase of securities is being effected, an operational facility will be used.
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The Custodian will give the Funds access to credit for the purchase of securities.
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No interest charged to the fund on the credit provided.
Points to Note on Shariah Compliant Funds
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Shariah compliant funds provide a means for investing, whilst maintaining ethical principles
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Large-scale investments are promoted, along similar lines of niche ethical funds available to Western consumers
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Funds can be more expensive to develop and administer than mainstream funds due to need for verification for Shariah compliance
Aziza Atta Founder and Managing Director afm consulting
[email protected]
Aziza Atta is an Islamic finance lawyer, Founder and Managing Director of afm consulting (Alternative Finance and Marketing Consulting). Aziza has advised numerous financial institutions and corporations on various types of Islamic financings and products in Europe, the Middle East and Africa. She has acted for a wide range of institutions offering Islamic financial solutions including : Barclays Capital, Nomura International plc, HSBC and the UK Government on its proposed Sukuk issue. Aziza is part of the HMRC Technical Group for Sukuk and has been involved in providing advice to the UK Government and the Financial Services Authority in relation to legislative and regulatory efforts to accommodate Islamic finance in the UK. Before establishing afm consulting, Ms Atta worked at Norton Rose LLP in London and UAE, Freshfields Bruckhaus Deringer in London and Belgium, Shell Petroleum Development Company in Nigeria and Proyecto Ak’Tenamit in Guatemala. Ms Atta has published several articles on Islamic finance and is a regular speaker at Islamic finance conferences worldwide.
Disclaimer The purpose of this presentation is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of afm consulting on the points of law discussed. No individual who is a member of afm consulting, accepts or assumes responsibility or has any liability to any person in respect of this presentation.
